Terry McCrann: No more banks making 20 per cent returns on equity for decades

THE single biggest message from the banking royal commission is that the finance sector has been getting billions in “inappropriate” income every year, writes Terry McCrann.

THE single biggest overarching message that has come out of the banking royal commission is that the financial sector has been getting “inappropriate” income which has run — and continues to run — into the billions of dollars every year.

On Monday, and for the next two weeks, it was/will be a case of “here we go again”, as the “inappropriate” income which has flowed from customers to insurance companies will be detailed in agonising and often, entirely appropriately, embarrassing detail.

$120 MILLION TO BE REPAID FOR INAPPROPRIATE CAR YARD INSURANCE

SUPER FUNDS IN SPOTLIGHT AT BANKING ROYAL COMMISSION

These customers of insurance companies join those of banks for consumer and small-business loans, those in the financial advisory chain, of superannuation more broadly, along with farmers and Aboriginal and Torres Strait Islander people, of all shown to have been paying money they should not have.

Now I used the word “inappropriate” very deliberately and for two reasons.

The first is that the payments cover a very wide spectrum of behaviour — from outright fraud to overcharging, whether deliberately and wrongly, or through bureaucratic mistake, or legitimately but not appropriately, to just plain entirely legal overcharging.

The second is to caution against the simplistic belief that all we have to do, in the wake of the RC, is to just get rid of illegal or even the broader “bad practices” behaviour.

My term “inappropriate” actually covers a much wider spectrum of charges that are paid by consumers — charges which are entirely legal but were nevertheless unnecessarily excessive and are now arguably unsustainable.

Kenneth Hayne is presiding over the financial services royal commission.

We should come out of this RC with those excess charges, mostly flowing from our system of compulsory superannuation, significantly reduced, just as much as those practices which generated income that were unambiguously illegal or unwarranted.

Furthermore, this wouldn’t be achieved simply by either the market or regulation sending superannuation money from the profit-driven retail funds to the industry funds.

Yes, the latter might not need to generate a profit, but they ride on exactly the same excessive fees that permeate the investment and funds-management industries.

The central, systemic, consequence of the RC, therefore, is going to be — must be — to deprive the financial-services sector of billions of dollars of income every year.

I don’t think anyone has really thought much about the widespread and necessarily traumatic consequences of such a loss of income, which cannot be simply replaced by “appropriate” charges.

The idea that banks, insurance companies, superannuation funds etc — and their customers — would all live happily ever after on fees structures that were ethical and appropriate really just does not wash.

I’m certainly not suggesting we stick with the established order: the entire financial system has been shown to be due a thorough “cleansing”. I would caution, though, against over-egging the degree of deliberate criminality.

Once again, the old advice of a “stuff-up over a crime”, is more indicative — united with a combination of sloppy rather everyday incompetence and a “masters of the universe-style” arrogance.

NAB chief executive Andrew Thorburn, whose bank has decided not to immediately increase its mortgage rates.

The critical point I want to highlight is that of the requirements and challenges of the post-post RC financial system.

The post-RC system is now locked in the evidence of the RC. We will get more laws, more regulation and more regulators. Just how effective that will be remains of course to be seen, and not just over years but decades.

My point is about the post-post RC — a financial system which has lost billions of dollars of income that it used to take for granted.

Very broadly it’s going to be dealt with, one way or another, by deliberate action or by default, efficiently or messily, in various combinations of three things.

They will be increased — upfront and visible — charges to customers and massive and across-the-board reductions in both financial-services employment and incomes.

The third is a consequent reduction in the profitability of the sector.

Those higher specific charges and cost cuts — and a likely major consolidation of players — will not be sufficient to sustain revenues and margins.

We are not going to see the Commonwealth Bank again generate 20 per cent returns on equity, for example, in the foreseeable future — and in this context, the future is “foreseeable” in decades.

Further, this trauma is going to happen quite irrespective of and so without taking any additional account of the “digital disruption” which is only just beginning to shred financial-services revenues and even more profits.

It also takes no account of even a “normal” slowdown in the economy. And another GFC-style implosion: that would make life even more “interesting”?

NAB’S RATE PLAY — OR PLOY?

NAB CEO Andrew Thorburn has thrown a real curve-ball into this emerging post-post RC world.

We want to see more — or even just “real” — competition among the big banks? Well, he seemed to deliver it with his lower home rates play.

The obvious question is how sustainable it is; and indeed how sustainable it was intended to be.

Thorburn more or less said it was only temporary: he talked of holding its rate longer (my emphasis), so NAB would help its customers longer.

If so, this could become a double loser.

As NAB faces exactly the same costs as its competitors, at some point it will raise its rates by more than them, to catch up.

How will new borrowers feel, when that happens? Unfairly lured?

Or will NAB take a permanent profit hit?